Wednesday, June 11, 2008

State of the Market - 6/11/08

A modestly lower open today quickly turned into something much worse for Wall Street today, as higher oil prices caused the early selling to accelerate early in the session. The selloff was so severe that the technical levels of 1350 on the S&P and 2430 on the Nasdaq didn’t even give the market reason to pause, as they broke right through them, reaching morning lows around 10:30. From there, the market basically stayed in a range into the lunch hour, although they tried to rally a few times, but were rejected at those same former support levels. A little after 12:30, the indices did break their lows for the day, but another small rally attempt ensued, but that also amounted to nothing. At 2:00, with the market sitting right near its lows for the day, the Beige Book report came out, and this caused a little pop in stocks, but once again they were rejected around the 1350 and 2430 areas. Around 3:15, the market broke to new lows and things once again looked like they were going to get even uglier, but “someone” came in and tried to save the day. For the first time in a while, they couldn't do so, the selling continued instead, and the market finished at its lows for the day. The Nasdaq once again led to the downside, with a loss of over 2%. Volume appeared to be slightly lower, but that can't be much solace to the bulls right now.

Technically, this is obviously a very poor market, with the Nasdaq now below its 50 day moving average and very little technical support below in sight, at least that I see. The Russell 2000 tried its best to hold onto its 50 day today. The S&P and Dow still look like death after breaking recent lows today. The next level of support for the S&P would be around 1325, but for the Dow, I don’t see support until around 11,750, which is near the March lows. Things look very bad right here, but there is nothing that says they can’t get worse. With oil continuing higher each day, and the dollar continuing lower each day, there isn’t much reason for dip buyers to come in and save the day. Sentiment isn’t even that bearish – the new Investors Intelligence Survey shows bulls are still at 43% and bears are only at 32.6%. The put/call ratio was at 1.25 this morning but decreased as the day went along. The VIX was only up modestly today for as much as we were down. The fact that those numbers barely budged from last week after the damage that has been done the past week is not a good thing for the bulls.

That being said, this is a market that is getting a little oversold and one that could bounce sometimes soon. The T2108 indicator has just dropped off a cliff this week and is approaching the 20 level that typically indicates a very oversold condition. Does that mean you should run out and buy some of these falling knives to catch a bounce? Best of luck if you do, but I know I won’t be. Markets can stay oversold for long periods of time, and with sentiment not being that bearish, who knows how low we go and how heavy the selling gets? After rallying from March to May, the market is clearly back into bear mode, and any bounces will likely just be opportunities to add to shorts. I would guess the 1350 level (maybe up to 1370) on the S&P and the 2430 level on the Nasdaq will now likely turn into resistance for the indices – those are the levels I will watch if the market happens to bounce the rest of this week.

I added a short in PCLN this morning as none of the steel stocks I was looking at really broke down. PCLN broke through its 50 day moving average on Monday, rallied to it on weaker volume yesterday, and today appeared to be continuing its move lower. Since it wasn’t that far away from its 50 day, I figured the stop loss level was very clear and I wasn’t risking that much. I also entered QID again as QQQQ looked like it was breaking below some very important support levels as well. It sucks that I was stopped out of this position last week, but that’s how this market has been – very tough and choppy. I am a little bitter about getting stopped out of nice shorts like BOOM, ISRG, and most of all LEH too early, and missing some very nice gains. Right now, though, I am positioned with some decent looking shorts and am hopeful I can get some of that money back.

Not much else to say - today's action says it all. Bulls just couldn't defend those support levels for the third day in a row, and amazingly didn't even give it much of a shot. We finished clearly below those levels, and because of that, the only thing to do is remain in cash, manage your current shorts, or wait for a possible bounce to add more shorts. There aren't a lot of new possibilities there that aren't already extended to the downside outside of the commodity sector. If the selling accelerates here, who knows? Maybe even the untouchable oil and ag stocks will feel the pain. I'll be back with some of the charts I mentioned above, and a look at some of the shorts I am watching. Best of luck in your trading.

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